Well, I’m pissed at the market and pissed that I ignored the odds for the lower low that the Close Near the Lows model called for. At the same time, I can’t be too pissed because the market does not always follow the odds. The S&P futures traded between R3 and R4 for most of the day and when the market did not show signs of clear weakness off the open (which we actually have been seeing in recent days), I thought testing yesterday’s low was nearly out of the question. Of course, anything can happen in the market (clearly, today was an example), but at that point in time in the morning, I dismissed the possibility of making a lower low as the odds did not seem like they would play out today. The model uses the SPYs data so looking at the SPYs, today they actually traded above R4 for most of the day. Again, since I did not see the usual weakness off the open in the market today, I did not feel that the 124.52 level, which is yesterday’s low, was in the picture. But sure enough the low print in the SPYs was 124.29. I was short in the morning believing that we would make a lower low soon off the open, but when that did not work, I flipped to being long. That worked okay until the late afternoon sell off. Anyway, that was my vent. So on that note, I will be returning back to my odds analysis blogs.
I recently wrote about a tightening in the daily range of the S&P futures. We still have been stuck in a tight range in the market. If you did not catch my first blog on this topic, I defined tightening in the daily range as days when the range ended up being less than the 20 day average daily range (ADR). Using this definition, today was the 8th consecutive trading day that we have seen a tightening in the range. This study covers data from January 2000 and since then there have only been 72 instances when the daily range tightened eight sessions in a row. In other words, this type of daily range tightening does not happen that often (roughly 2.6% of the time since 2000).
What I focus on in this analysis is what occurs in the 5, 10, and 20 days following this type of move in the market. Below are the results:
I won’t go into all of the specifics, but rather I’ll give a general summary of what I garner from this data. The probability of being up over 0%, or moving higher, in the next five days is 55.6%. I actually want to focus more on the average and median change numbers this time around. The average 5d chg is flattish (down 5 bps) and the median 5d chg is 58bps. Given the roughly 50/50 odds of going higher and the flattish average change, I don’t think we see the narrow range in the market resolve itself to either side in the five day term. The next five days, in my opinion, will remain relatively calm, perhaps a widening in the range, but no huge rally or sell off.
Then I extended the analysis to observe the 10d change. Now the probability of the market going higher in the next ten days drops a bit down to 43.1%, so a little skewed to the bearish side. The average 10d chg is down 96bps while the median is down 45bps. These data points to me suggests downside pressure in the 10 day (or two calendar week) term. Finally, I included the 20d change as well as I noticed that moves could occur as late as one month afterwards. I’ll actually pause here to note that of the limited times we have seen eight consecutive days of tightening in the daily range, Dec. 2010, Dec. 2009, Dec. 2008, and Dec. 2007 all saw this type of move. A quick look back at the S&P chart shows that the following month of January tended have noticeable pullbacks. January 2011 will be a bearish month for me (although I seem to be bearish all the time). Going back to the data, the average 20d chg is -1.8% and the median 20d chg is -1.65%. These bearish figures are confirmed by the lower probability of 41.7% that the market will move higher (above 0%) in the next 20 days.
Of course, my interpretation of this data is just one of several others. However, I read this data as suggesting that the next five days will probably remain calm, a continuation of the uptrend we have been in perhaps. Then the subsequent five days (i.e., in the next ten days from here), we will start seeing some pressure to the downside. And then January will bring a pullback in the market (note the term “pullback” and not “sell off”) as the 20d average chg is -1.8% and the odds favor (though only very slightly) moving lower (a less than 0% return) in the market.
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